Assetz® News - The paradox of lower rates

The paradox of lower rates

17th July 2008 |

Those seeking to invest in property might have expected very little in the way of good news of late, with the economy as a whole and the inflation situation in particular the subject of negative headlines. Yet all may not be what it at first seems.

For one thing, those hearing recently that the consumer prices index (CPI) rate of inflation had climbed to 3.8 per cent might not have believed they would read anyone suggesting that the Bank of England's monetary policy committee (MPC) may shortly be embarking on a radical programme of base rate cuts.

Yet such a prediction has come today from a spokesperson for Capital Economics, who told findaproperty.com that while it is hardly good news, the rise in CPI has been anticipated for a long time, unlike some of the other recent economic news, much of which could indicate that the slowdown will be more pronounced than anticipated.

Such a major fall could be exactly what the MPC fears, both in terms of its consequences for the UK economy (a large slowdown if not a full recession) and the risk that inflation could undershoot its two per cent target rate as a result.

The spokesperson concluded: "The upshot is that we continue to expect UK interest rates to drop to around 3.5 per cent next year - well below the path currently anticipated by the markets."

Based as it is on the analysis that the MPC will be "constrained" in its rate policy by fears of inflation, this prediction may be said to assume the monetary policy screws being kept a little too tight for too long. Whether that turns out to be so or not, the obvious implication is that major rate-cutting action later on may be avoided by smaller cuts sooner. Either way, that means the next move being down. With the Financial Times suggesting today that the MPC's newest recruit, Bank of England chief economist Spencer Dale, may be a "swing voter" on the issue, future decisions may be hard to call.

Yet aside from any base rate predictions and speculation, the good news for those buying property is that some rates are falling. Swap rates are coming down and with them mortgages. The latest lender to make a change, for the second time in two weeks, was Nationwide, who stated this week that from tomorrow (July 18th) their fixed and tracker rates will be trimmed by 0.46 per cent. This follows similar moves from the likes of Woolwich and Abbey.

Commenting on the news, David Hollingworth of the mortgage brokerage London & Country told the Daily Mail: "We are starting to see jostling between the lenders. We have finally got a competitive spirit back into the market."

In a week when the Council of Mortgage Lenders has come up with new proposals to improve liquidity in the markets, it may seem ironic that the fall in swap rates that has been awaited for so long appears to be happening. If this trend occurs then in the mortgage market at least the cost to borrowers may keep on falling whatever the MPC decides to do next.